Decision Tree Analysis A manager is trying to decide whether to buy one machine or two. The demand realized can be either high, medium or low. If only one machine is purchased and demand proves to be high, the manager has three options - doing nothing has a net present value of $120,000; subcontracting, $160,000; and buying the second machine, $140,000. The probability of high demand is equal to sum of the probability of low and medium demand. Further, the probability of medium demand is 1.5 times the probability of low demand. For medium and low demand, the net present value is $140,000 and $120,000 respectively. If two machines are purchased, the after-tax net present value of the benefits are $90,000 if demand is low, $135,000 if demand is medium and $180,000 if demand is high. The probability of high demand is same as probability of medium demand. Further, the probability of high demand is 2 times the probability of low demand.

1. What is the expected payoff if manager purchases one machine?

2. What is the expected payoff if manager purchases two machines?